MISSOULA -- U.S. Agriculture Undersecretary Mark Rey walked out of federal court a free man Wednesday in Missoula, wearing not an orange inmate's jumpsuit but the gray business suit with American flag lapel pin he had donned for his contempt hearing.

U.S. District Judge Donald Molloy cleared Rey, the Bush administration's top forest official, and the Forest Service of contempt and withdrew his threat to jail Rey or ground all fire retardant air tankers until the agency evaluated the environmental impact of the chemical slurry.

Molloy did not rule on the merits of the Forest Service's environmental analysis, and the watchdog group whose lawsuit prompted the showdown said it planned to take new legal action to challenge the agency's finding that aerial retardant causes little harm to fish and other aquatic creatures.

"We accomplished what we wanted to do, which was to make the Forest Service follow the law," said Andy Stahl, director of the Forest Service Employees for Environmental Ethics, based in Eugene, Ore.

In his testimony, Rey apologized for the Forest Service's tardiness in following the judge's order to complete an environmental analysis of the potential harm from ammonium phosphate, the primary ingredient in retardant dropped on wildfires.

But Molloy was not mollified and forced Forest Service employees in their testimony to acknowledge their "systematic disregard of the rule of law."

Before announcing his ruling, Molloy delivered a blistering criticism of the Forest Service, saying only a threat of contempt prompted the agency to comply with the nation's top environmental laws the National Environmental Policy Act and the Endangered Species Act.

The judge also questioned the federal government's battery of lawyers who handled the case, dismissing their " attempts" at explaining the delays and their "parsing of words to create unjustifiable arguments."

Rey and other Forest Service officials maintained they had acted in good faith, but Molloy said it was "shameful" that it took a threat of contempt to make the agency comply with the law.

"Something's remiss," Molloy said. "I don't know if it's the lawyering or an institutional matter."

The case drew national attention because of the prospect of a top White House official being jailed and the nation's fleet of retardant tankers sitting on the tarmac as the United States grapples with record-setting wildfires and firefighting costs, which now consume nearly 50 percent of the Forest Service's budget.

Government lawyers spent time Wednesday explaining the importance of aerial retardant, saying it is critical in helping to control wildland fires.

The case stemmed from a 2003 lawsuit brought by Forest Service Employees for Environmental Ethics after the Forest Service dropped fire retardant that killed 20,000 fish in Oregon in 2002.

In 2005, Molloy ruled that the Forest Service violated the law when it failed to go through a public process to analyze the potential environmental harm from aerial retardant.

Since then, Molloy has granted the agency a series of extensions to complete an environmental review, which it filed in October.

The Forest Service amended its review last week after receiving additional information from the U.S. Fish and Wildlife Service and the U.S. National Marine Fisheries Service.

Forest Service staffers attributed their delay to several factors, including delays caused by their sister agencies and the complexity of studying retardant's potential impact on more than 400 species across the nation.

The Fish and Wildlife Service and the National Marine Fisheries Service found that fire retardant jeopardizes dozens of endangered or threatened species, but that the risk can be reduced if the retardant is applied carefully under certain conditions.

The Forest Service said retardant can be used without significantly affecting those species as long as the agency monitors their mortality and health and takes steps to keep the chemical slurry away from waterways.

The Forest Service uses an average of 15 million gallons of retardant on fires a year, although that figure has reached 40 million gallons during severe fire years in the past decade.

The FSEEE wants to use the suit to force the agency to change its firefighting policy to an emphasis on fire prevention around communities and allowing fires to burn if they pose minimal threat rather than extinguishing most blazes.

Edward Little, a biologist with the U.S. Geological Survey, testified that more than 25 years of laboratory and field research indicates that aerial retardant has a negligible toxic effect on fish, amphibians, insects, plants, mammals and birds.

The Forest Service several years ago stopped using the one chemical in retardant that was toxic to aquatic and other species, he said.

Joseph Carbone, a NEPA specialist for the Forest Service, testified that the agency completed a broad review of the retardant's potential ecological impact, but it didn't consider the cumulative impact of retardant drops and ground-based firefighting.

"If you start to bring in every possible connected action ... in using retardant, then you're into many conditions and scenarios and you're going down a path of so many unknowns," he said.

In his closing argument, Department of Justice attorney Michael Guzman maintained the Forest Service had acted in good faith and that its actions, however tardy, did not warrant a finding of contempt.

He told the judge putting Rey behind bars and grounding retardant tankers would serve no purpose.

The watchdog group's lawyer, Tim Bechtold of Missoula, said the Forest Service had acted like a petulant child who only stops putting his "hand in the cookie jar" when a threat is leveled.

"The Forest Service needs a little adult supervision," he said.

Bechtold added that Rey deserved to be punished, "and based on his cutting the Forest Service's budget, I can't believe they wouldn't want to see him in jail, too."

Rey, a former timber industry lobbyist who has directed U.S. forest policy since 2001, smiled at his opponent's jab.

After the hearing, Rey said he takes his obligation to follow the law seriously, but that he would not rush the Forest Service's scientific decisions, in part, because environmental groups are eager to level accusations of political interference.

"If we had to do it again, we would have done things a little differently," he said.